Key Highlights

“Customers are looking for high-quality, easy-to-use digital services these days, and it’s our job as an association to support regulatory framework that enables and has easy-to-use digital services. We believe that technology like distributed ledger technology is one of these potentially very high-level digital services and technologies that really may make a difference.”

“Our goal, at least as an association, is really to try to bring together these two worlds: the traditional financial services world, which knows a lot about how banking is done and knows in particular the regulatory framework. Then on the other hand, you have this new world with these new technologies where you have a lot of tech specialists who know a bit less about regulatory requirements.”

“Our regulatory approach, as a nation is: same business, same rules. So actually, everybody has to be aware that if you do payments, you have to follow the payment rules, independently of whether you’re now working with a new technology or the old technology, it doesn’t really matter. So it’s very clear that everybody has to basically obey the same rules. That, in our view, is very important to how you can bring together that more traditional world and the world that is now emerging with this new technology.”

“What we believe is actually we have to adopt very specifically certain elements in our existing law to make this complaint, because we believe in principle based technology-neutral legislation and regulation.”

“There’s a few questions that we have to answer, really enabling and opening doors where there are certain uncertainties on blockchain, with our blockchain guidelines, but also … how this is treated tax-wise, how does it work on a balance sheet and the like. But from our perspective, innovation doesn’t happen with us as an association. Our job is to create a regulatory environment that actually allows the firms and our members in particular to be innovative.”

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Full Transcript

Angie Lau: Welcome to this special edition in Switzerland. I’m Forkast.News editor-in-chief Angie Lau. To understand how blockchain is shaping banking innovation from a Swiss point of view, one must come to Zurich and speak to the Swiss Bankers Association (SBA).

The SBA is a self-regulated industry group where almost every bank in Switzerland is a member. The SBA coordinates new banking innovation, regulatory concerns and guidance for all its members. These are firms from some of the biggest names — Credit Suisse to UBS and everyone in between. It coordinates and guides this communication with federal policymakers.

This direct dialogue is helping shape some of the most innovative blockchain thinking in banking today. With me right now is SBA deputy CEO August Benz to help us think about Switzerland in the broader context of this global blockchain industry. So welcome, August.

We’re sitting across the Limmat river, and we’re in the heart of Zurich right now where a lot of this banking innovation as it pertains to blockchain is really thriving, but not a lot of people know about it. Tell us what’s happening here.

August Benz: Customers are looking for high-quality, easy-to-use digital services these days, and it’s our job as an association to support regulatory framework that enables and has easy-to-use digital services. We believe that technology like distributed ledger technology is one of these potentially very high-level digital services and technologies that really may make a difference.

We have a pretty thriving community, also in a few other locations here in Switzerland, Zug in particular that everybody knows about with their Crypto Valley. We see [ourselves] as an association, as a door opener, how we can enable this new technology to really thrive, not just in this new developing world, but also in the traditional financial services world.

Lau: So increasingly, regulatory compliance is being baked into a lot of the business thinking of these new blockchain startups. That really changed from even last year and the year before. Can you tell me why?

Benz: Well, there’s been a very big effort here in Switzerland because we see this technology as something with a lot of potential, and actually a lot of the stakeholders here trying to support this new technology as well. How can we put this into practice? That goes from the government who strongly supports these initiatives, but also, in the startup scene which is very active here.

Also, our members are close and see quite a lot of potential in this technology. Then we as an association try to bring together these stakeholders as well. That’s what has been happening over the last year or two, and we think we’ve made quite a bit of progress.

Our goal, at least as an association, is really to try to bring together these two worlds: the traditional financial services world, which knows a lot about how banking is done and knows in particular the regulatory framework. Then on the other hand, you have this new world with these new technologies where you have a lot of tech specialists who know a bit less about regulatory requirements. Our job is trying to bring these two worlds together.

Lau: What are these relationships like? It seems like you have very direct communication with policymakers. They’re also seeking guidance from the group, from not only the banking industry, but also from blockchain startups and players as well.

Benz: Yeah, I can give you a specific example. One of the things that became very obvious was that it was very difficult for DLT firms, for blockchain firms who were working in that space to get a corporate account, really just to pay salaries and just do the normal things that you would otherwise do.

There’s been a lot of pressure on the community overall because if you want if you want to thrive in this industry, in this country, then we somehow have to resolve this topic. The concerns are very clear that we have to obey these anti-money-laundering rules, we have to know where the money is from, KYC, know your customer. That is something that is very important if you want to be respected and be a serious player in the financial services world.

That was the background of when we started looking into this, what could we do to support this industry and actually enable this technology in this market. We’ve published a guideline already last year on how to open such corporate accounts for blockchain firms and what you have to consider, so which AML elements that are very important, and how you actually should follow it.

Last month we’ve released the second version, an updated version, because fintechs do develop, and we’ve tried to make it even more clear and to clarify points. In our view, it has really started getting the whole thing moving in terms of that it’s much easier than it used to be to open such an account. So if you follow these rules, there’s a pretty good chance these days in Switzerland that as a blockchain firm you can operate from within the traditional financial services world as well.

Lau: So when people come here, and when startup projects start to grow their blockchain idea or their DLT idea here in Switzerland, how do they engage differently to a global competitive landscape? How are the companies that begin here behaving differently, or what is a unique characteristic of companies that get started here against this regulatory backdrop and guidance?

Benz: Our regulatory approach, as a nation is: same business, same rules. So actually, everybody has to be aware that if you do payments, you have to follow the payment rules, independently of whether you’re now working with a new technology or the old technology, it doesn’t really matter. So it’s very clear that everybody has to basically obey the same rules.

That, in our view, is very important to how you can bring together that more traditional world and the world that is now emerging with this new technology. It all pretty much started in 2014 or about five years ago, with Ethereum starting here in Zug. Our ecosystem developed over the last couple of years where various stakeholders who were trying to support this industry really emerged with roughly more than 800 blockchain related firms in different shapes and forms now trying to leverage the opportunities that you have here.

But I think it’s really this interaction between the authorities, startups, the financial services world, also on the judicial side, the banks and insurance companies which are also very active in this field. They have their own small ventures as well trying to explore and trying to find out ways that really help them to make processes more efficient. And of course, various things are happening on the banking side.

Lau: And what’s motivating Switzerland?

Benz: Switzerland is a very, very innovative country. It’s always been ranked number one in terms of innovation for many, many years. So it’s something that people really like here. We see that blockchain and DLT is something that really could change the way that financial services are being provided. We would like to be at the forefront of all of this potential change. In our view, this is actually very nicely connected with the characteristics and the nature of a lot of Swiss people.

Lau: It is incredible innovation that obviously would have a huge impact in fintech. Are the big banks embracing it as quickly as perhaps smaller, more flexible, fast moving firms when it comes to blockchain? Because it’s not obvious right now.

Benz: The best way to find out is if you talk to the big banks, what I can tell you is that I see quite a lot of projects that they’re working on. Trade and finance are very obvious examples where you could make processes significantly more efficient. A lot of banks, not just Swiss banks are involved in this venture. So there’s a lot of activity actually happening, but it is best to really talk to them.

What happens here in Switzerland in terms of relationships between the banks and the fintechs is we see this as a pretty symbiotic relationship. At the beginning the discussion was, “are these real, will they cannibalize the traditional world?” and the like. But we more and more see this as as pretty symbiotic.

What is happening on the fintech side is often very innovative, they can be much faster, can try things more quickly. They’re allowed to fail as well. And if something really works out, they can really link up with banks. That’s what we’re starting to see now, that a lot of the Swiss traditional banks collaborate more and more now with fintech. We think that is actually a very good way forward for both parties.

Lau: Is this a model that you’ve adopted as you compare what other innovations are happening across Europe and around the world, in other countries?

Benz: Switzerland is probably a special case. Things here are very bottom-up driven. So this is not something that somebody says “this is now the plan” and then we do it. In this situation, this is not something anybody planned. It happened, but for us, what is important to know is if you see this as an opportunity, then we believe it’s critical that you actually really try to then bring it to the forefront and make it possible if it really turns out to be a true reality or opportunity.

Lau: What makes it really unique is that there is this triangulation of industry groups, of traditional legacy banks, and then of the completely innovative startup industry; blockchain and DLT. There really is this very symbiotic environment that seems to exist here. Where do you think that philosophy came from? Is it the Swiss way of doing things? How did this come about?

Benz: This is probably a bit in the DNA because Switzerland is not a large country, so people do know each other. That provides these opportunities that you actually can collaborate very well. Refer to the recent event that was organized. Two weeks ago we organized our very first event called Banking Meets DLT, that’s been a collaboration between the Swiss Blockchain Federation, the University of Basel Center for Innovative Finance and the Swiss Bankers Association.

So we grouped together, and the idea here was very much to confront banking employees who work in all kinds of different fields and to bring them together with DLT specialists. We programmed and designed a whole event around this, it was a full-day program, it was actually highly oversubscribed.

We brought in the regulators who were presenting and were on panels, the two digital banks that just got a license, for example, presented their business case, storage solutions were presented and various use cases in trade, finance. Other use cases were also presented, trying really to bring together the various stakeholders. That’s happening not just in our world, it’s really something that you see here in many occasions.

Lau: What were the top projects that came out of that Banking Meets DLT event?

Benz: Well, that’s hopefully really something that goes back to the banks, and for us as an association, we would like to repeat it, the plan is now to do something in the French-speaking part of Switzerland.

Lau: Give us a sense of some of the projects, like some of the services that we might be able to see as a result of DLT in banking.

Benz: For an association, that is not our focus. That is something that [involves] business decisions and the like. So that’s not really something that we can promote. For example, one of the things that was also presented was, how exactly do traditional banks these do duties like KYC, AML processes when they on-board such blockchain related firm?

They were explaining all the questions and tried to answer, what databases they use and whatever is included. There were a few open questions still that they’re trying to address further now, and that’s something that I would expect is going to trigger other banks interested in looking into this as well. So they got a few examples of how it could be done, and so I would expect even more of these corporate accounts being opened.

Lau: One of the big themes of 2019 is regulatory framework that could potentially guide growth. That is a lot of the desire that we’re hearing from the industry, increasingly so. Having said that, how do you compare and contrast yourself from a regulatory framework against international regulations?

Do you think that there needs to be a lot more collaboration from an international point of view, or do you think that you want to create a lot of those banking innovations and regulatory innovations from a Swiss point of view?

Benz: As an association we don’t regulate as such, but we are very keen on understanding and trying to shape a bit what is happening on the regulatory side. If I looked at this from a more international level, then our credo has always been to have a level playing field, same as I said before, same business, same rules.

But also from an international perspective we would expect, particularly as a small country, that it’s very important to have a level playing field. Now, in this specific topic of DLT and blockchain, we believe that Switzerland is pretty much at the forefront in terms of how this could be regulated and should be regulated. We’ve gone right through a consultation process now of how this should be regulated in Switzerland. We don’t go for a dedicated blockchain law.

What we believe is actually we have to adopt very specifically certain elements in our existing law to make this complaint, because we believe in principle-based, technology-neutral legislation and regulation. And so that’s where we are in the midst of it. Now, if you compare this to an international level, we had a very different starting point, we have here a very different kind of law and setup compared to other jurisdictions.

But we believe that at the end of the day, we should all aspire at least to have a level playing field. A good example here are the FATF rules, the Financial Action Task Force, they look at this topic very specifically and have come out with a few guidelines in terms of blockchain firms. And actually that is something that needs to be applied to everybody and certainly applies to Switzerland.

In fact, FINMA last week published — when they provided licenses to these digital banks — they also published some additional guidelines in terms of anti-money laundering rules that actually go somewhat beyond even what the FATF requires. So I think critically, they have a level playing field. But you can go further, and in particular from a Swiss perspective it’s very important that we are absolutely compliant on the anti-money laundering topic.

Lau: KYC, AML, very critical issues. But also, tokens and future coins in the way how projects raise capital for their ideas. What about the thinking around that, and how is the association trying to help with that guidance?

Benz: We have very regular interactions with the authorities. To give you two examples here, one of them you just mentioned: How do we tax digital assets? So be it cryptocurrency or anything else, any other token? That’s a very critical question in terms of how you do business depending on what tax it is. At the moment our tax authorities have come out with the first guidance on how it could be treated. From our perspective, there’s still a few more questions that are open, and we are now trying to clarify this further together with them.

Lau: What are the questions or concerns from your organization?

Benz: In terms of the taxation topic now, the question really is, what kind of asset is it really? Because that brings me actually to the second topic, which is also not clear; how should this be treated on the balance sheet side? Where do we book tokens? And depending on where you book it, it can be taxed differently.

So that’s the first question in our view that we have to clarify — how should it be treated on a balance sheet. Once we’ve got this answered, then it should be much clearer how you’ll be taxed as well. So for us, that’s a question we don’t quite know [the answer to], we may have a slightly different view in terms of how best this could be treated on the balance sheet side.

That’s when we have the discussion again with the tax authorities. These are the two big questions that we have at the moment, how is this treated on the balance sheet — this has implications in terms of taxation.

Lau: We often hear of U.S. guidelines as being the gold standard because it’s one of the strictest in the world. How do you compare and contrast Switzerland with that standard. Do you think there’s an alternative? Is there potentially a global gold standard that can be innovated outside of the U.S.?

Benz: In terms of overall regulation, we actually have a lot of visitors from the U.S. as it happens, because we really believe that we are pretty much at the forefront here. So there we have a lot of discussions with them. They visit sometimes us, but they visit a lot of the authorities as well.

So I can’t tell you exactly how this evolved — they have a slightly different approach at the moment. Should they have a slightly different standard? Again, this is something that we have to look into again once it is public. But so far, we believe that we have a pretty good approach, and we have to see if they come out with their regulation what it means for our own regulation.

Lau: The SBA has been at the forefront for a lot of innovation for its members. Where do you think it’s going into 2020 and beyond as this entire industry evolves?

Benz: That’s a very difficult question. I can tell you that as an association, we see ourselves as a door opener. For example, for us, it’s absolutely critical that banks start working with cloud services. If you have big banking secrecy, like we have here still in Switzerland, that’s quite a difficult discussion.

We published last year a cloud guideline to enable them, because if you want to do big data machine learning as a bank, which lots of them are looking into, then for capacity reasons the bank has to start working with the cloud. Otherwise, just technologically and capacity-wise, it’s going to be a challenge. So that’s something we are trying to enable with this cloud guideline. And also, this is pretty much at the forefront, so there’s a lot of international interest as well on how we do this.

Another topic is the whole open banking ecosystem topic. That’s because banks very clearly, in our view, have a lot of opportunities in terms of developing ecosystems. The question is, how do we do it? Europe has done this with regulation called PSD2. We don’t see an obligation to do this, but we see there’s a lot of opportunities.

The question is about working on details about standardized interfaces, how settlements work when you disagree about certain topics and the like. There’s a few questions that we have to answer, really enabling and opening doors where there are certain uncertainties on blockchain, with our blockchain guidelines, but also various topics we just discussed — how this is treated tax-wise, how does it work on a balance sheet and the like. So trying to clarify wherever there are uncertainties to enable innovation.

But from our perspective, innovation doesn’t happen with us as an association. Our job is to create a regulatory environment that actually allows the firms and our members in particular to be innovative.

Lau: How excited is the banking industry here in Switzerland with all these innovations?

Benz: For the Swiss banking financial center, such an innovation is critical. We believe that we are in a very good position, we have lots of assets here. We have, in our view, a very unique starting point and position. We have a very stable economy and a lot of foreigners placing their assets here because it is a very stable economy and it’s safer to have the money here. Everything is actually compliant.

Lau: But it is still critical to Switzerland’s overall economic growth.

Benz: It is of course critical, however, now with all these new technological opportunities, we now have the opportunity to really move forward also in terms of the way that we provide services to make this much more efficient, better for the client. That’s what we’re trying to support and foster — the clients that bring the money here, that we can serve them in the best possible way.

That means that we have to change the way that we do things, that we have to change in pretty much every respect. That is a process that is ongoing, that will keep us busy for many, many years. And for people like us who like change, that’s a very exciting prospect.

Lau: Well, not everybody likes change, so I always admire people who do. Last question for you: What do you think the biggest external obstacle is and how do you hope to overcome it?

Benz: For me, it’s really critical now to bring together these two worlds, because if you bring together the traditional banking world with this newly developing world that does financial services, but in a different way, we believe that bringing them together really triggers more innovation.

That’s what we’re trying to foster here to actually enable these innovations in Switzerland, because we would love it if a lot of these activities and innovations come out of here and actually are being implemented here.

Lau: I certainly don’t doubt it in the years to come. Thank you so much for your insights.

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